It involves the repeated import and export of small, high value goods such as computer chips and mobile phones.

Under European trading rules a UK company importing the goods does not have to pay VAT but charges it to the next British company it sells the goods on to.

The goods are then exported before being re-imported.

WHAT IS CAROUSEL FRAUD?

Small high-value goods, such as mobile phones, are imported free of VAT from EU countries and sold with 17.5% tax added in the UK.

Instead of handing the VAT to the Government, the importing company run by criminals is shut down and the cash is kept by the importers.

This loss of tax is often compounded when the new owners of the goods export them again and can legally reclaim the VAT they paid.

Goods go round in a "carousel" via bogus supply chains within and beyond the EU because they are repeatedly imported and exported.

By exporting the goods to Dubai, the fraudsters break the evidential chain making the fraud harder to detect.

Each time the goods go round the carousel, the VAT that should be paid to HM Revenue and Customs (HMRC) goes missing.

The fraud first emerged in the mid-1990s but has exploded over the past year in the UK as criminals have exploited what law enforcement officials call the "Dubai Connection".

This involves exporting the goods to Dubai, which is outside the Single Market, before sending them back into the EU and round the carousel again.

By exporting the goods to Dubai, the fraudsters break the evidential chain making the fraud harder to detect.

According to the Belgian study, almost three quarters of the tax stolen by the fraudsters in the UK between June 2005 and June 2006 involved carousel frauds using the Dubai connection.

From December, a new VAT system aimed at stopping the scam will be introduced.

Called a "reverse charge", it means that for certain electronic goods only the final retailer will be able to levy VAT.

It aims to stop the criminals stealing VAT charged on goods imported free of the tax from elsewhere in the EU.

The Paymaster General, Dawn Primarolo told BBC News 24 that the government rejected Belgium claims that Britain had lost £8.4bn of revenue to tax fraudsters.

"The government wasn't involved in the compiling of this report and it simply isn't credible to accept the figures that are present in this report reflect a true picture.

"We've led the debate in the European Union of what's necessary in order to prevent and frustrate these attempts at stealing money and it¿s very important to keep it in that context."

A Treasury spokesperson told Panorama that fraud estimates had been published for the past five years, and would be updated in the next pre-budget report.

"We cannot comment on the substance of this report and we do not recognise the figures that are set out for the UK," he said.

This fraud is widely acknowledged as a problem across the EU

UK Treasury

"However, MTIC fraud is widely acknowledged as a problem across the EU and we continue to work closely with our European partners to counter it."

"More than 1,400 HMRC officers are now involved in tackling carousel fraud.

"In response to the recent increase in attempted fraud, HMRC has significantly strengthened this strategy through a combination of legislation, litigation and operational activity," the spokesperson said.

"Recent operational data and trade figures show a significant reduction in the level of trading associated with MTIC fraud, and we are confident that this trend will continue, assisted by the forthcoming introduction of the reverse charge."

This is a website update to a Panorama film first broadcast on July 16 2006 called Do You Want To Be A Millionaire which investigated "carousel fraud" and confronted one convicted criminal, "Riviera" Ray Woolley. He was hiding in Switzerland having escaped from prison by hailing a taxi.